2018 (8) TMI 379 - AT - Income Tax

Disallowance of depreciation - Held that - In the present case, undisputedly by virtue of C.A. the assessee has acquired the right to operate the toll road / bridge and collect toll charges in lieu of investment made by it in implementing the project. Therefore, the right to operate the toll road / bridge and collect toll charges is a business or commercial right as envisaged under section 32(1)(ii) r/w Explanation 3(b) of the said provisions. The assessee is eligible to claim depreciation on WDV as an intangible asset. Thus, we answer the question framed by the Special Bench as under The expenditure incurred by the assessee for construction of road under BOT contract by the Government of India has given rise to an intangible asset as defined under Explanation 3(b) r/w section 32(1)(ii) of the Act. Hence, assessee is eligible to claim depreciation on such asset at the specified rate - appeal of the revenue is dismissed.

Issues Involved:
1. Disallowance of depreciation of ?78,01,926/-
2. Disallowance of expenditure under section 14A amounting to ?28,31,250/-
3. Disallowance of employee’s contribution towards PF under section 36(1)(v) amounting to ?21,027/-

Issue-wise Analysis:

1. Disallowance of depreciation of ?78,01,926/-:
The primary issue in this appeal concerns the disallowance of depreciation amounting to ?78,01,926/- on the BOT project. The assessee claimed depreciation on the BOT project at 25% considering it as an intangible asset, leading to a depreciation claim of ?17,01,00,116/-. The Assessing Officer (AO) referred to CBDT Circular No. 09/2014, which mandates the amortization of the expenditure over the remaining period of the project. The AO computed the allowable amortization to be ?16,22,98,190/-, resulting in a disallowance of ?78,01,926/-.

Upon appeal, the CIT(A) deleted the disallowance, following the Special Bench decision of ITAT Hyderabad in the assessee’s own case for AY 2011-12, which recognized the expenditure on BOT projects as creating an intangible asset eligible for depreciation under section 32(1)(ii). The Special Bench held that the right to operate the project facility and collect toll charges is an intangible asset of enduring benefit, thus eligible for depreciation. The CIT(A) directed the AO to follow the ITAT’s directions and allow the depreciation accordingly.

The Tribunal, considering the rival submissions and the material on record, upheld the CIT(A)’s order, affirming the decision that the expenditure incurred by the assessee for the BOT project creates an intangible asset eligible for depreciation. The Tribunal dismissed the revenue’s appeal on this ground, reiterating that the right acquired by the assessee under the Concession Agreement to operate the project and collect toll charges qualifies as a business or commercial right akin to a license, thus falling under the category of intangible assets as per section 32(1)(ii).

2. Disallowance of expenditure under section 14A amounting to ?28,31,250/-:
The CIT(A) confirmed the disallowance of ?28,31,250/- under section 14A. This section pertains to the disallowance of expenditure incurred in relation to income not includible in total income. The assessee did not appeal against this disallowance before the CIT(A), and thus, it was not a subject of contention in the present appeal before the Tribunal.

3. Disallowance of employee’s contribution towards PF under section 36(1)(v) amounting to ?21,027/-:
The assessee did not appeal against the disallowance of ?21,027/- towards the employee’s contribution to PF under section 36(1)(v) before the CIT(A). Consequently, this issue was not raised before the Tribunal and did not form part of the current appeal.

Conclusion:
The Tribunal dismissed the revenue’s appeal, upholding the CIT(A)’s order that followed the Special Bench decision recognizing the BOT project expenditure as creating an intangible asset eligible for depreciation. The disallowance of ?78,01,926/- was deleted, and the other disallowances under sections 14A and 36(1)(v) were not contested further. The judgment was pronounced in the open court on 3rd August 2018.

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